Knowledge and Detour for Sustained Catch-up:

Schumpeterian Analysis of the Asian Experience

Numerous studies have focused on the poverty trap, a highly relevant topic for low-income
countries. By contrast, few studies seek methods with which to sustain growth beyond the
middle-income level. Although several studies propose that developing countries can take off
by targeting industries with comparative advantages, few discuss the issue of sustaining
growth after the initial spurt of development, which tends to be short-lived. Thus, the
questions that motivate this study are as follows: Which factors lead to sustainable growth?
Which factors cause a short-lived catch-up, particularly for middle-income developing
countries?
The current study proposes technological capability as the key factor for sustainable
progress. A detailed analysis of the innovation system at three levels (firm, sector, and
country) is provided, using a neo-Schumpeterian perspective. We examine the diverse aspects
of innovation systems, which include the localization of knowledge creation and diffusion,
the concentration of knowledge creation among inventors or sectors, as well as the cycle
times and originality of technologies.
Empirical analysis shows that successful catching-up economies and their firms specialize
in short-cycle technologies, thereby promoting the localization of knowledge diffusion and
creation as well as enabling further development based on indigenous capabilities. This is a
rational strategy because sectors with shorter technological cycle times see the frequent
emergence of new technologies as existing ones rapidly become obsolete. Thus, latecomer
economies need not master existing technologies dominated by the advanced

economies,

which tend to be more active in sectors with longer cycle times. Additionally, a
complementary relationship similarly exists between specialization in short-cycle
technologies and the localization of knowledge creation, because using short-cycle
technologies means relying less on existing ones dominated by advanced countries.
The technological specialization described above (using short-cycle technologies versus
long-cycle

technologies) can be considered a detour strategy, because developing

economies do not attempt to replicate high-originality, long-cycle technologies common in

advanced economies. Rather, the countries that successfully catch up with developed ones
initially move in the opposite direction and use short-cycle or low-originality technologies.
However, as these countries advance in terms of technological development, their own
success affords or enables them to eventually move into more diverse fields that include high-

originality or longer cycle time technologies. This phenomenon has been occurring in East
Asia since the 2000s. By contrast, a few less successful middle-income countries, such as
Brazil and Argentina, adopted a direct replication strategy focused on high-originality
technologies with longer cycles. This strategy may lead to continuous reliance on advanced
foreign countries, which in turn creates few opportunities to localize knowledge creation.
The analysis reveals the double-edged nature of short-cycle or frequently changing
technologies: they can serve either as windows of opportunity or as additional barriers to
entry. Although Korea and Taiwan achieved successful catching-up in short-cycle sectors,
other lower-tier countries encountered difficulties. This has to do with the notion of truncated
learning (Lall 1992, 2000), according to which frequent technological changes interfere with
the effectiveness of learning, and acquired knowledge becomes obsolete or useless with the
advent of new technologies. Latin American countries tend to register more patents in longercycle sectors, and their economic growth tends to be positively associated with specialization
in longer-cycle technologies.
The current study proposes a broad roadmap that recommends technological
specializations for middle-income developing countries and trade-based specializations for
low-income developing countries. The existing literature encourages low-income countries to
follow trade-based specializations to exploit comparative advantages associated with their
natural resource endowments. In this manner, such countries can command international
competitiveness in certain industries that are typically inherited from higher-income countries,
as predicted by the product life-cycle theory (Vernon 1962). Following this line, low-income
countries may reach middle-income status. However, in countries that employ initial
comparative advantages, labor-intensive industries depend on low wages and thus face
medium-term risks associated with wage rate increases. Worse, new and lower-cost labor
sites in next-tier countries always emerge to take over these countries positions in the global
value chain. Thus, developing countries may be caught in the middle-income country trap
associated with the so-called adding-up problem. Moving upward for higher value-added
activities in the same industries, and/or gaining entry into newly emerging ones presents a
longer-term challenge for developing countries.
A developing country intending to move beyond the middle-income stage could implement
technological specialization in short-cycle or emerging technologies, or establish upgraded
niches in new value segments of current industries. However, these transitions require
technological and design capabilities based on learning and local R&D effort. Initially,

latecomers attempt to enter mature segments in short-cycle technology sectors, as seen in the
indigenous development of telephone switches in Korea, China, India, and Brazil. Upon
successful entry, a more ambitious strategy of leapfrogging into emerging technologies may
be attempted, for example, the development of digital TV in Korea or 3G wireless standards
in China. Technological specialization involving leapfrogging may encounter more risks,
particularly: 1) proper selection of technologies or standards, and 2) availability of the initial
market for these technologies. Thus, gaining entry into new, emerging industries requires
government assistance in the form of 1) technology policies that promote

public-private

R&D consortia, and/or 2) exclusive standard policy, procurement, and user subsidies for
initial market provision. These strategies entail much risk, but present the only available path
toward achieving higher profitability, faster growth, and eventual high-income status. As
such, the above method qualifies as a detour via niche strategy, which in hindsight may be
viewed as a shortcut. Toward the end of this path, a latecomer economy can eventually
become similar in status to high-income countries that focus on developing both long-cycle
and short-cycle, and higher-originality technologies.
One may question the rationality of all middle-income countries specializing in the same
short-cycle technologies. Such an inquiry is analogous to the adding-up problem, which
refers to the risks involved in the labor-intensive specialization practiced by all low-income
countries. In other words, developing countries that compete against each other in the same
area of specialization risk eliminating their initiatives and disrupting the industries. However,
a specialization based on factor endowments is relatively fixed, with few opportunities for
change. Specializing in short-cycle technologies does not entail a fixed list of technologies.
Instead, the implication in sectors with short-cycle technologies is that new technologies
always emerge to replace obsolete old ones. In other words, the criteria for technological
specialization is less about the cycle length itself but more about the technological sectors
that rely less on existing technologies and offer greater opportunities with newly emerging
technologies. The short-cycle time variable is merely a proxy for such criteria. Continuous
technological emergence suggests the availability to new entrants of fresh windows of
opportunity that are not confined to old, dominant technologies. This concept is the exact
opposite of the product life cycle, in which latecomers merely inherit old or mature industries
or segments from incumbent economies.